The opinion of the court was delivered by: BONSAL
The individual defendants and defendant SMR Holding Corporation ("SMR") moved pursuant to F.R. Civ. P. 12(c) for an order dismissing the amended complaint and granting judgment on the pleadings in their favor. Plaintiff moved for leave to file a second amended complaint. At argument on September 9, 1974, plaintiff's motion for leave to file a second amended complaint was granted, and it was agreed that defendants' motion would apply with equal force to plaintiff's second amended complaint. In addition, plaintiff moves for an order pursuant to F.R. Civ. P. 23(c) determining that this action may be maintained as a class action and for an order appointing a receiver of the property and assets of Federated Development Company ("Federated").
Plaintiff, allegedly the beneficial owner of 13,525 shares of Federated, sues individually, as the representative of all shareholders of Federated similarly situated, and derivatively on behalf of Federated. Plaintiff seeks damages and injunctive relief. The individual defendants are or were trustees of Federated. Defendant SMR is a privately owned Delaware corporation organized for the purpose of acquiring majority control of other companies. Jurisdiction is predicated on section 27 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78aa, and principles of pendent jurisdiction.
Federated is a business trust organized under the laws of New York. On March 8, 1973, Loeb, Rhoades & Co. ("Loeb, Rhoades") a broker-dealer, and partners of Loeb, Rhoades and members of their families owned approximately 16.1% of the outstanding shares of Federated. Loeb, Rhoades is referred to in the complaint but not named as a defendant.
On September 19, 1973, SMR announced an offer to purchase 800,000 shares of Federated, representing approximately 50.0089% of Federated's issued and outstanding shares, at $12.25 per share. The offer was to remain open for 10 days and expire at midnight on September 29, 1973. During the period of the SMR tender offer, the Federated Board of Trustees sent two communications to Federated shareholders. The first, dated September 21, 1973, advised Federated shareholders that the Board was studying SMR's tender offer and would mail a second communication containing any recommendation the Board might have with respect to the offer. The second communication, dated September 24, 1973, informed Federated shareholders that the Trustees and those shareholders of Federated associated with Loeb, Rhoades were tendering their shares. However, the communication went on to advise shareholders that the Board of Trustees had approved a plan of liquidation for Federated and that the book value of Federated was in excess of $16 per share. It appears that 1,396,602 of the 1,599,714 shares of Federated outstanding were tendered to SMR during the period of its offer. Of the shares tendered, SMR accepted 800,000 on a pro rata basis.
Pursuant to the request of SMR, a special meeting of Federated shareholders was called for January 7, 1974 for the purpose of increasing the Federated Board of Trustees from 8 to 17 Trustees and to elect 9 nominees of SMR as Trustees to fill the newly-created vacancies. No proxies were solicited, but a notice of special meeting and an information statement dated December 14, 1973 were distributed to Federated shareholders. On December 21, 1973 Federated announced an offer to purchase 150,000 of its shares at $7 per share.
Plaintiff alleges that Loeb, Rhoades, the individual defendants and SMR acted in concert to turn control of Federated over to SMR and to maximize for a select group of Federated shareholders (hereinafter referred to as the Loeb, Rhoades group) the benefits of SMR's tender offer of September 19, 1973, all to the detriment of Federated and the outside Federated shareholders. Five separate claims for relief are asserted. The first and third claims relate to SMR's tender offer of September 19, 1973 and allege violations of sections 10(b) and 14(e) of the Exchange Act, 15 U.S.C. §§ 78j(b), 78n(e) and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5. The second claim asserts violations of section 10(b) and Rule 10b-5 in connection with Federated's tender offer of December 21, 1973. The fourth claim pertains to the notice of special meeting and information statement distributed by Federated in connection with the special meeting of shareholders on January 7, 1974, and alleges violations of section 14(c) of the Exchange Act, 15 U.S.C. § 78n(c), and Securities and Exchange Commission Rule 14c-6, 17 C.F.R. § 240.14c-6. Finally, plaintiff's fifth claim alleges a breach of Federated's listing agreement with the New York Stock Exchange in connection with the special meeting of shareholders of January 7, 1974.
Defendants' Motion for Judgment on the Pleadings
The Court of Appeals has repeatedly held that only a purchaser or seller of a security may maintain an action for damages under section 10(b) of the Exchange Act and Rule 10b-5. Haberman v. Murchison, 468 F.2d 1305 (2d Cir. 1972); Iroquois Industries, Inc. v. Syracuse China Corp., 417 F.2d 963 (2d Cir. 1969), cert. denied, 399 U.S. 909, 26 L. Ed. 2d 561, 90 S. Ct. 2199 (1970); Greenstein v. Paul, 400 F.2d 580 (2d Cir. 1968); Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir.), cert. denied, 343 U.S. 956, 96 L. Ed. 1356, 72 S. Ct. 1051 (1952). Although a stockholder has been permitted to seek injunctive relief against threatened or continuing fraud, Mutual Shares Corp. v. Genesco, Inc., 384 F.2d 540 (2d Cir. 1967), he lacks standing to seek injunctive relief once the fraud has been consummated. Berne Street Enterprises, Inc. v. American Export Isbrandtsen Co., CCH Fed. Sec. L. Rep. para. 92,711 (S.D.N.Y. 1970).
Plaintiff does not allege that he is a purchaser or seller in connection with either SMR's tender offer of September 19, 1973 or Federated's tender offer of December 21, 1973, or that the fraud alleged in connection with those tender offers is still continuing. He is therefore without standing to assert claims for damages or injunctive relief under section 10(b) of the Exchange Act and Rule 10b-5 either individually or as a class representative. Although not a purchaser or seller in connection with SMR's tender offer of September 19, 1973, Federated was a purchaser in connection with its own tender offer of December 21, 1973. However, plaintiff has alleged no injury to Federated as a result of any purported fraud in connection with that tender offer. Accordingly, defendants' motion for judgment on the pleadings in their favor is granted as to plaintiff's first and second claims.
Section 14(e) of the Exchange Act provides:
"It shall be unlawful for any person to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or to engage in any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer or request or invitation for tenders . . . ."
As a non-tendering shareholder of Federated, plaintiff has standing to assert claims for damages and injunctive relief under section 14(e) in connection with SMR's tender offer of September 19, 1973. Chris-Craft Industries, Inc. v. Piper Aircraft Corp., 480 F.2d 341 (2d Cir.), cert. denied, 414 U.S. 910, 38 L. Ed. 2d 148, 94 S. Ct. 231 (1973); Electronic Specialty Co. v. International Controls Corp., 409 F.2d 937 (2d Cir. 1969).
Plaintiff alleges that in connection with SMR's tender offer of September 19, 1973, the defendants engaged in an unlawful scheme to maximize the benefits of the tender offer for the Loeb, Rhoades group at the expense of other Federated shareholders. According to plaintiff, the scheme combined a short tender offer period with deliberately confusing communications in an attempt to prevent outside shareholders from tendering their shares within the required time period. Specifically, plaintiff alleges that the communication of September 21, 1973 sent by the Federated Board of Trustees to Federated shareholders indicated that the Federated Board of Trustees would study SMR's tender offer when in fact the individual defendants then knew that the tender offer would be successful and that there was no alternative but to tender all shares. Plaintiff further alleges that the plan of liquidation announced in the Board's communication of September 24, 1974, with mention of a book value of $16 per share, was deliberately intended to mislead Federated shareholders because the individual defendants knew but failed to disclose "that such plan of liquidation was not agreeable to SMR and could not be put into effect." The Court finds that these allegations state a claim under section ...